assets to protect against inflation

Investment Options To Protect Against Inflation

Print Friendly, PDF & Email

I was blown away when I read this statement by Morgan Housel (emphasis added):

“Adjusted for inflation, the two stimulus packages passed in the last nine months are roughly equal to what we spent fighting World War II over two years.”   – Morgan Housel

As much government spending as World War II.  Wow.  

Imagine the potential implications.  Is it remotely possible that spending that much could, possibly, fuel a future surge in inflation?  After WWII inflation surged to 28 percent in the last 6 months of 1946.  Sure, there were other factors, like pent-up demand (sound familiar? How much traveling have you done lately?). 

Not to be an alarmist, but of course it’s “remotely possible” we’ll see an uptick in inflation in the coming years. 

It’s also remotely possible that your house will burn down.

I bet you have house insurance.  But have you done anything to protect against inflation?

Today we’ll look at some investment options to protect against inflation.  Inflation is a real risk, especially for those in retirement.  Recognize the danger, and ensure you’ve got a plan to hedge your exposure.

Inflation surged after WWII.  Could it happen again after extensive stimulus spending?  A remote chance, perhaps, but so is the risk of your house burning down.  You have house insurance, right? Click To Tweet

investments to protect against inflation

Investment Options To Protect Against Inflation

Inflation has been unusually tame for the past decade, which is exactly why you need to start paying attention (remember “mean reversion”?).  Here’s a chart of inflation since 2011, courtesy of usinflationcalculator:

inflation rate over time

Note, however, that the long-term rate of inflation is 3.1%, and anyone who believes in reversion to the mean (which includes me) knows that the risk of higher inflation is always lurking.  Here’s the inflation rate by decade since 1913, courtesy of inflationdata:

long-term inflation trends

Inflation is the Silent Killer of retirement, and if inflation returns to historical levels it can be devastating to your retirement.  In a post two years ago, I challenged you to answer an “Inflation Quiz”.  Most of you failed.  Here was the question, and the answers guesses you provided:

Inflation costs of retirement

The Correct Answer:  A $60k lifestyle in 1970 would cost you $213k in 1990, an answer only 19% of you chose.  The rest of you failed the test, so let’s try again.

How much will a $65k Tesla cost in 30 years, assuming a 3% inflation rate (the long-term average).  If you have a great memory, you’ll recall that I answered that question in the same article

The Correct Answer:   A $65k Tesla today will cost $158k in 30 years at a 3% inflation rate.

The tricky thing about inflation is that it’s almost invisible.  Sure, you’ll have noticed those gas prices climbing in recent months, but it’s hard to grasp the overall impact inflation has on your cost of living over time.  If we return to more historical rates of inflation, it’s something you need to concern yourself with.

Ignore inflation at your own risk.  

Asset Classes To Protect Against Inflation

As you develop your asset allocation strategy for retirement, it’s critical that you keep inflation in mind.  Paying for higher gas isn’t all that bad if your investments have kept up with inflation.  It’s REAL returns you need to focus on, or the return of your investments after subtracting the inflation rate.

Google the term inflation, and you’ll find the following definition:

“Inflation:  A general increase in prices and fall in the purchasing value of money.”

The trick is to find investments that offset that “fall in the purchasing value of money”.  So, what are the best asset classes to protect against inflation?  Here’s a summary of those most experts cite as being the most effective options in hedging your risk of inflation:

1. Real Estate

You always need a place to live, and real estate is perhaps the best inflation hedge available.  Folks debate about “buy” vs. “rent”, but buying your home is one of your best moves to protect against inflation.  With our retirement cabin paid for, I don’t really care how much housing prices increase.  It simply doesn’t affect me.  If we choose to move, the increase in our home’s value will allow us to buy another home that’s also increased in price.  In the meantime, my housing cost is fixed (excluding property taxes and utilities, of course). That’s inflation protection.

Buying a rental home is also a viable strategy, and one of the reasons we recently bought a second home.  Many people have built a successful retirement income stream based on rental income, which is a great way to protect against inflation.  If inflation surges, rental prices will also likely increase.  Sure, you’ve got the issue of dealing with renters and additional properties, but it’s a strong inflation hedge if you’re up for the related challenges.

If you prefer an easier route, consider REITs., or Real Estate Investment Trusts.  We own Vanguard’s VGSLX REIT in our portfolio (we consider it part of Bucket 2 in our Bucket Strategy), and consider it as part of the 10% we target for “Alternatives” in our Asset Allocation strategy.  REIT’s are easy to buy and sell, and avoid the hassle of property ownership. They also provide a decent dividend return which can be utilized for your retirement cash flow.

Finally, Peer-To-Peer lending is an option.  We have a small position in PeerStreet (~1% of our Net Worth), primarily to gain firsthand experience with the peer-to-peer offerings.  I’ve been happy with our position, which has earned a 6.7% return since we opened our account in 2016.  

2. Precious Metals

In the 9th article I ever wrote, I answered the question “Should I Buy Gold?”.  The answer I gave then is the same I’ll give now:  “It depends” (read the article for more details).  In summary, precious metals offer value in a diversified portfolio, but they need to be incorporated as a strategic element in your overall portfolio design, not simply purchased for speculation.  I include my precious metals holdings in the 10% of my asset allocation that I target for “Alternatives”.  Below are some of the ways you can invest in precious metals, and they can comprise a solid element in your plan to protect against inflation:

Physical Metal:  I bought my first silver coins in 2011 and my first gold coins in 2014.  I’ve added a small investment of “bunion” to our holding every year.  I use APMEX for my purchases, the total of which is less than 1% of our Net Worth.  There’s something reassuring about having a small stash of coins, and with the 2020 runup in gold and silver prices my returns have been good.  I doubt I’ll ever sell them, and suspect my daughter will inherit them when my wife and I are gone.  I enjoy it as much as a collectible as an investment, but owning precious metal coins does protect against inflation in the process.

Gold/Silver ETF’s:  An easier (and more liquid) way of owning precious metals is to invest through an ETF that follows the Gold and Silver commodity price.  The ETF Database has a great summary of these funds.  For Gold, the largest is GLD, (1-year return 9.6%, 5-year return 41.2%) for Silver it’s SLV (1-year return 47.4%, 5-year return 71.1%).  Don’t be seduced by those juicy returns, gold and silver ETF’s are notoriously volatile and should only comprise a small % of your overall portfolio.  

Miner Stocks:  Stocks of mining companies can either be purchased individually or via EFT’s such as GDX and GDXJ.  Visual Capitalist did a nice infographic on the returns of various mining companies that comprise the GDX fund. 

Full Disclosure:  I trade GDX, GDXJ, NG, GLD and SLV in my “fun money” account at TDAmeritrade, the entire balance of which comprises ~3% of our Net Worth.  These are some of my targets for options trading, which is beyond the scope of this article.  To read about a simple options trading strategy, read “An Option Trading Strategy To Improve Your Returns.”

3. Commodities

Commodities are the raw materials used to drive the world’s economy, from metal (copper, aluminum) to energy (oil, natural gas) to food to lumber.  Commodity price trends can be a bit predictive for inflation since an increase in raw material costs is typically “passed along” through higher consumer good pricing, and is often a leading indicator of future inflation.  Commodity prices, as you’d expect in a low inflation environment, have underperformed over the past decade.  That’s the reality of a diversified portfolio and an indicator that they may perform well in a high inflation environment when other asset classes lag.

The easiest way to invest in commodities is via ETF’s, and there’s an ETF for almost any commodity you could dream of owning.  Check out this list from ETF Database and enjoy your trip down a rabbit hole.  I didn’t realize until doing this post that there’s even an ETF for aluminum, the industry where I spent my 33-year career.  Hmmm…I may need to look into that one.  I don’t own any commodities at the moment (I decided to sell any ETF’s that had K-1’s because I hate waiting at tax time), but have limited them to 1-2% of my overall portfolio in the past and considered them in the 10% of “Alternative” class in my asset allocation.  Owning individual stocks of companies in the commodity space (e.g., XOM) is another viable option to invest in the sector. 

Finally, a quick note about Crypto-currency.  I haven’t included it specifically here, since I consider it primarily a speculative investment.  That said, you could view it as an alternative currency class, which is typically considered in the “commodity” asset class.  I would view it as a potential way to protect against inflation, but I’d prefer to see some of the speculative pricing swings settle down before I’d consider it a viable option.

4. TIPS & I-Bonds

I’m a big fan of TIPS and I-Bonds, and started buying my annual $10k allotment of I-Bonds in 2016, which I’ve continued every year on the website.  To see the difference between TIPS and I-Bonds, read this description from Treasury Direct.  I’m not sure why I started with I-Bonds, and don’t view the difference between the two as particularly relevant (do your own homework, you may decide differently.  There are differences, but that’s outside the scope of this article). Both are US government-issued bonds specifically indexed to inflation.  Here’s how the mechanism works for TIPS (source: TreasuryDirect):

Twice a year, TIPS payout on a fixed rate (note, I-bond income isn’t realized or taxed until you sell, that’s one of the differences).  The principal value of TIPS changes based on the inflation rate, therefore, the rate of return includes the adjusted principal.  If, for example, you purchased a $10,000 bond paying 2% interest, you’d receive $200/year.  If inflation surges to 5%, the principal value of your TIP bond would increase 5% to $10,500 and pay your interest based on that higher amount.  So, instead of $200, you’d receive $210.  Unlike “normal” bonds which typically decline in value in inflationary times, TIPS increase in proportion to inflation. I can’t imagine a much better way to protect against inflation. 

While we could, theoretically, purchase up to $20k/year of I-Bonds (both my wife and I could buy our $10k allotment), an annual $10k purchase fits well with our bucket strategy (part of Bucket 2) and makes a predictable bond ladder in the future years as the bonds mature (you can redeem I-bonds without penalty after 5 years, but they’ll continue to pay interest for 30 years, offering nice flexibility as you design your future retirement income streams).

5. Delay Social Security

The final option I’ll review to protect against inflation is to delay your social security, which I outlined in “Should You Take Social Security at Age 62 or 70?”  Rather than rehash the details of this strategy, I’d encourage you to read that article.  In summary, your Social Security payment increases annually with inflation.  By delaying your social security, your “denominator” is larger than if you claim early, so your annual inflation increases result in a larger dollar increase to help offset inflation.

In closing, some folks have asked me about the effectiveness of stocks as an inflation hedge.  I’d place them at #6 or #7 (if I included Farmland, which I considered), but had to cut off the list somewhere.  If you’re interested in solid dividend stocks (my preference as an inflation hedge), check out Sure Dividend’s posts: Dividend Aristocrats ListTop 4 Stocks to Start Your Retirement Portfolio, and How To Build Your Dividend Growth Portfolio.  All represent some very solid writing from a smart blogger who focuses on dividend investing. 


Just because inflation has been dormant for years doesn’t mean it will stay that way.  Recognize the threat that inflation has on your retirement lifestyle, and think through your strategy for how you plan to protect against inflation.  Left unguarded, it could cause a lot of pain.

Kind of like having your house burn down.

You may want to consider buying some insurance.

Your Turn:  Do you think about inflation as a risk during your retirement?  Do you have any investments that mitigate your risk?  Let’s chat…


  1. Great points Fritz!

    I’m a big believer in mitigating risk, especially of inflation. Even if the stimulus packages do kick start the economy, interest rates are still at historical all-time lows.

    I’m sure some of us still remember when the interest rates peaked at over 20% back in the 1980s. Many good friends of mine had their dreams destroyed when they were forced to walk away from their homes. Hopefully, we’re not headed there.

    Personally I believe the economy is in tatters and will take years to rebuild. That’s not to say rising inflation and interest rates won’t be big factors to consider. Like yourself, I’m taking a diversified approach. For me, that means staying away from traditional “safe” investments such as bonds and focusing on investments of growth.

    1. Shannon, concerning times, for sure. I share your uncertainty about where things are headed from here, and I’m playing it the only way I know how. Diversification. Diversification. Diversification. And…3 years of cash in case I need to hunker down and let things ride out. Plan for the worst, hope for the best. Thanks for your continued engagement with my blog, much appreciated!

  2. Great article, Fritz
    As you know, the “insurance” we’ve bought against inflation is rental real estate. It provides solid cashflow in the present while locking in long-term debt at current low interest rates. The rents rise while the payment stays the same! As you mentioned, this does involve a little bit of work (nothing is truly “passive” income) but we find the earnings justify the time spend.
    I agree on your assessment of BTC – at some point, I feel like world governments are going to jump into digital currency on blockchain and render BTC as a memorable trial run. I could be wrong, but I don’t see governments allowing a private monetary solution to become so large as to compete with their own currencies. Not that I necessarily agree with that, but I just don’t see it happening.
    I don’t know if you saw this infographic that I posted, but it be interesting for your readers in this context (comparing money and asset supplies globally:

    1. Paul! Great to see you leaving a comment! You’re crushing it with your rental real estate, and a great example of someone who has carefully considered all of the pros and cons of pursuing the rental option before implementing a successful strategy. You should start a blog! Smiles.

      Blockchain is a fascinating sector to watch, I’ll continue to monitor. No doubt it will revolutionize many areas of our economy, but tough to know where the winners and losers will be. Time will tell. Finally, I love Visual Capitalist, and that chart is a great one to share. Thanks for adding value to the discussion. Let’s have lunch next time you’re up in the mountains, it’s been too long!

  3. Hi Fritz, for those of us with access to the Thrift Savings Plan G-Fund, do you think it would suffice as a substitute for category #4 above (TIPS and I-Bonds)?

    1. Casey, I had to check into the G-fund since I wasn’t familiar with the details, looks like it’s 100% short term treasuries, so would not have the built in inflation adjustment that the TIPS and I-bonds do. I could be mistaken, but it doesn’t appear to be a viable substitute as an inflation hedge.

  4. I like series I Bonds also ,have been purchasing them before 2008 when limit was higher , you can purchase up to $ 15,000 per individual now if you get 5,000 tax refund in paper and buy 10,000 electronic

    1. Lorie, congrats on being the first to ask this question, I’ll answer it here for all. Stocks would be #6 or #7 (if I’d have added “Farmland”). I had to cut the list off somewhere, and stocks are a bit more subject to debate as an inflation hedge vs. the list above. Also, I was trying to encourage people to consider diversification, given that most of my readers already own stocks.

      As for stocks, I could write an entire article about their effectiveness as an inflation hedge. This article from Forbes summarizes it well:

      “Stocks used to be considered an inflation hedge, on the theory that higher prices meant higher earnings. Stocks almost kept up with inflation from 1968-82. That, however, was a disappointing result, as stock market returns normally exceed inflation by a wide margin. The problem seems to be with companies that buy raw materials or merchandise for resale, then sell the finished products at a later date. The inflationary gains are taxed as if they are productive earnings. Companies are, in effect, over-taxed in inflationary times.”

      We could debate this topic for hours, perhaps the subject of a dedicated post in the future. And, of course, each investor must decide for themselves what type of “insurance” they’re comfortable with. Stocks are a viable option, but realize there’s some debate on their effectiveness as a pure inflation hedge play.

      1. Thank you Fritz for this great article. I mostly agree with your analysis but I am not sure about the these 2, (REITS & Gold/Silver). When inflation rises, the rates are likely to raise too and at that point any dividend paying equity (utilities, REIT’s) will get less attractive compared to the bonds, no? Far as precious metals, the *only* return I see is speculation based price rise, has no investment value. And to me this is bit more of a gamble. My $0.02

  5. Just made my first I bond purchase this week when filing our taxes, $5k. I believe that, technically, you can add that to the $10k/person, so $25k/year.

  6. Yeah this is a good reminder that I need to toggle my alternatives to include more Gold/Silver. I am also picking up some Bitcoin as well (though yes I know speculative). Even so, I figure it will be as good a hedge against inflation as any precious metal at some point.

  7. Another vote to include stocks (consumer staples, growth) as an option for inflation protection.

  8. Yeah this is my biggest worry to be honest. Printing money like we’re doing seems like a really bad idea, especially when the national debt is already seemingly irreconcilable. I don’t know where this all goes, or when it’ll get to where it goes, but I think it won’t be pretty.

  9. Hi Fritz!

    My wife and I are retiring in our mid-50s and I absolutely love your articles which have helped me tremendously in preparing to retire confidently. I believe I have most things figured out including converting my pre-tax 401k to a Roth IRA over the coming years to avoid future taxes/RMDs. But the one thing I keep struggling with is our bucket strategy. I am prepared to follow the exact strategy you outlined because it makes absolute total sense with the 3 buckets but I can’t figure out what funds to put in the buckets. Would it be too much to ask for you to send me the actual funds with % allocations you have in your 3 bucket portfolios? Don’t worry I won’t assume I need to do it the same way but it would sure help me out! I’ve even been trying to work with a financial advisor but they have not proven very helpful at all and I’m more of a DIY guy anyways. Any help would be really appreciated!! Keep up the amazing articles!

    1. John, congrats on crossing The Starting Line early! I did have some of my bucket funds listed in those bucket posts, will have to try to dig it out (or, you could do a search). I’m heading out in 10 minutes, will be offline for 2 days. Apologies that I can’t get you the information quickly, may require a future post. Congrats again!

  10. Great article Fritz, Having lived through and a having a young family during the 1970s Runaway inflation, I have become more concerned in past two years with the huge deficits the Federal Govt is running. Inflation was already on the horizon returning to a long term inflation rate of around 3%. Huge budget deficits could kick that into high gear. During the 70s my parents inflation protection was the double digit interest rates they received on Bank CDs. They marveled that they were so high. Problem for that is the damage it brings to the economy. I do think stocks offer some protection but they can also suffer when the high interest rates slow the economy. It’s very complicated and hard to predict. I will dip my toe into the REIT funds and mining ETFs to add more diversification. Government policies on spending, taxation and over regulation are the biggest threat to the economic future.

    1. Curtis, thanks for stopping by, old friend! I thought about those high CD rates as I wrote this post, I believe they were still less than the rate of inflation. Hard to believe. Your parents were in the “hard spot” for retirement, right in the crux of a major inflation boom. Good call for just “dipping a toe”, need to test that water before you go for a swim. Hope to see you again soon (I believe we had agreed to a birthday hike out your way, will reach out to you when we’re back from Alabama in a week).

  11. Fritz – thanks for the ideas on diversification options that hedge inflation. I had never heard of I-Bonds (or G-Bonds for that matter). At some point I also expect inflation will take off given our government spending pattern. While I am lucky that I will soon receive a comfortable company pension, my concern is that it is a fixed payment that doesn’t adjust for inflation. As your examples of cost inflation illustrated the impact on prices, the reverse is true of the inflation adjusted value of my pension. At this point I have my Buckets 1 and 3 filled but need to work on my bucket 2 investments. Thanks for the ideas!

  12. The risk of inflation you have to worry about is grossly overblown. Its fine if one wants to play conservative, I feel the same way just not about inflation risk. The Fed understands very well what is needed, it’s deflation we need to remain vigilant against.

  13. Great piece. And pleased it did NOT include stocks which for me as a conservative investor are for long-term growth. I think we are doing 4, if not all 5 of the items you mentioned, including delaying SS (as well as pensions and deferred comp). We use a TIPs bond ladder which are liability-matched against future expenses as part of floor and I have held I-Bonds in the past as well as rental real estate. And we also have small positions in REIT and commodity funds/ETFs. Who knows whether the potential for inflation will be realized or not-my guess is, as before, the current concern is a bit overblown-but agree it is prudent to mitigate the risk. Speaking of risks (and stocks..), many of these tools also mitigate downside market risk!

  14. Great post Fritz. It is incredible that most investors and most advisors and planners ignore inflation and deflation. They think the same disinflationary, most low inflation environment can and will continue.

    That is a guess. It could turn out to be an expensive guess for one who needs to protect their wealth.

    Thanks, Dale @ Cut The Crap Investing

Comments are closed.